In this post MFG & PFG environment, Iâ€™m curious if there is anybody who truly feels safe about the security of their funds at a clearing firm?

As a CTA, part of my business model is to acquire new clients, but there is too much fear and uncertainty right now for many of those potential clients to want their money anywhere near the futures industry. Iâ€™m wondering if anybody has fixed this problem to their own satisfaction. If so, what are you doing, and why do you feel it is a safe setup? Iâ€™m searching for solutions for those customers convinced of my programs merits, but too scared to send their money to an FCM.

The best I can come up with (except for doing your best FCM due diligence) is to only invest margin money, nothing more. My $100,000 program only needs about $10,000 in margin at any given time, so I am telling people to just send in the $10,000 and be prepared to make a wire if we need more at any point.

I can think of lots of long term solutions, but is there anything today? Has anyone come up with something creative??

there is also the issue of portfolio margining whereby you might have to have minimum amounts in the broker account as well.
An account I have with IB has this whereby the portfolio margining is different. Bascally you are required to have a higher minimum but then less margining.

Previously I might have kept more than required. (burnt by MFG) I now keep the barest minimum in an account and cross the fingers, sweep what i dont need...not much else i can do at present and i know its a poor strategy.

moto I dont think this has anything to do with futures. Portflio Margin is basically for stocks and options.

"Please note, at this time, Portfolio Margin is not available for US commodities futures and futures options, US bonds, or Forex positions, but US regulatory bodies may consider inclusion of these products at a future date."

If you're looking ok there [maybe only accept FCM's from the first 2 pages], then you do this:

Assuming your client is hopefully just investing a portion of his/her LNW, say 10% [minimize risk of ruin], then you build in some kind of theoretical headwind to subtract from your previously targeted net return based on the chances of the FCM blowing up.

You need to obviously make some pretty big assumptions like:

What are the chances of your FCM blowing up? Assume 1.5 blowups per 12 months from the 2 page FCM list of 52 FCM's who look ok to us [1.5/52 = 2.88% = the chances our FCM goes bust].

How much $$$ do we get back? Our two recent examples are MFG [call it 90 cents on the dollar] and PFG [call it 30 cents on the dollar], so we say we expect an average of 60 cents on the dollar in the event of an FCM blowup. So, our expected drawdown [for lack of a fairer word] is 40%.

BuyHigh SellLow wrote:Assume 1.5 blowups per 12 months from the 2 page FCM list of 52 FCM's who look ok to us [1.5/52 = 2.88% = the chances our FCM goes bust]. ... I therefore am targeting 13.85% per year at the same level of risk."

You could take your annual returns and randomly reduce 3% of them by 40%. I suspect you would see an increased volatility (and skewness and kurtosis) as well as lower return.

Are there other alternatives? Has anyone looked at getting credit default insurance for their broker? Or shorting their stock, or buying put options?

As implied in the above post, this issue equates to a 10% reduction in expected returns! Even assuming the problem does not get worse. And the law of cockroaches (there are always more cockroaches than you can see) says that the problem is probably worse than it looks.

Not a small problem. Everyone in this industry is affected: lower returns means less money spent on software products, books, seminars and training, fewer clients for brokers, worse prices for commodity hedgers, less revenue for exchanges, etc etc.

This is still sweeping around accounts at the same firm, so doesn't really help you that much, beyond the SIPC "backstop" of the IB Securities Account.

I still favor moving the excess funds out of the control of the FCM into separate FDIC bank accounts and only sweeping into FCMs as margin requires; this of course, assumes no transaction costs.

Of course, as portfolios grow, one will have to spread their reach to different bank accounts and different FCMs to try and mitigate unwanted risk as much as possible. This way, if one FCM fails it can have a negligable impact on the portfolio as a whole.

Lastly, I'm interested in how the issue of T-bills held as margin will play out with regards to PFG.

Aaron01 and trackstar.....yes as mentioned not for everyone, and not a perfect solution.....but it all may help. Thanks for pointing out the deficiencies.

You guys in the US seem to have more protections than many of us....(MFG has shown this)

Diversification may be the only free lunch, and there is the time cost element. (I have 8 separate bank accounts for my personal accounts - what a pain for end of year tax accounting - you would think i was hiding money from the wife)

There was a thread here talking about hedging the portfolio using options....from memory the summary of it was.
1...make sure the puts are held at a separate broker than the one you are shorting (you dont want to have to try and collect your gold from the Swiss bank when the s..t hits the fan and you are living in Australia)

2.... you only need to purchase enough options to make enough money to cover the account loss....ie; you dont need to delta hedge it, and can assume it goes to zero in order to determine the number of options to purchase and protect any lost margins.
3....cost for this insurance might be more than just letting it occur and having diversification.

No new suggestions here, but thanks for posting the Atlas rankings the other week.
I yanked all but 5 bucks from my Rosenthall Collins account regardless of the 'expert' yap yapping in the Introducing Brokers Vancouver office.
Moving further up the ranking list - will it matter - don't know.
Once bitten twice shy.

I escaped MFG just prior to their problem. Went with PFG and who knows how much I'll get back or when. It appears to be the Wild West out there. Ratings, etc. are irrelevant if there is no meaningful effective regulation or insurance of accounts. I'm seriously considering exiting futures trading. The potential rewards are irrelevant if we can be ripped off so easily.

My broker deals with these questions every day but now that they are owned by Knight, life is a bit easier. Penson was in a financial mess but still left client seg funds alone. When Knight was looking to buy Penson, they had their books and financials looked over with a fine tooth comb to determine viability.

They have privately hired an audit firm, PriceWaterhouse Coopers, who does a continuous audit annually.

KCG is publicly traded. When he tells clients that they are monitored by the NFA and the CFTC, that doesnâ€™t seem to carry much weight so he addÂ´s that the exchanges, particularly the CME, also scrutinizes their activities.

I just got the latest offer from people trying to buy MFG account claims, and they are now offering 93%. For some reason, I got a check that brings up one account to 80-something%, but I've not received one for the other account. I guess I need to contact them.

There's a part of me that expects it's just a matter of time until what has happened with MFG and PFG spreads into equity accounts somehow, somewhere. It may take the form of money market accounts that break the buck which quickly spreads. Few people have any clue that fund managers, money fund, stock funds, bond funds, etc, can all limit withdrawals to preserve as much of the fund's value equally as possible. In fact the Fed is most recently looking at rules on money market fund distributions under pressure.

Financial fraud prosecutions are at a 30 year low here in the US over the past three years with this administration, and the way the whole MFG thing has been handled is beyond imagination -- if this was a movie, everybody would say it was horribly done since it was so unrealistic. Welcome to "rule of 'law'" circa 2012 in the USA.

Chuck B wrote:
There's a part of me that expects it's just a matter of time until what has happened with MFG and PFG spreads into equity accounts somehow, somewhere. It may take the form of money market accounts that break the buck which quickly spreads. Few people have any clue that fund managers, money fund, stock funds, bond funds, etc, can all limit withdrawals to preserve as much of the fund's value equally as possible. In fact the Fed is most recently looking at rules on money market fund distributions under pressure.

I had money in the Reserve Fund when it "Broke the Buck". Got $0.97 on the $1, and had all money locked up for a while. I forget the exact timeframe but I know it was longer than 3 months.

Chelonia wrote:My broker deals with these questions every day but now that they are owned by Knight, life is a bit easier. Penson was in a financial mess but still left client seg funds alone. When Knight was looking to buy Penson, they had their books and financials looked over with a fine tooth comb to determine viability.

They have privately hired an audit firm, PriceWaterhouse Coopers, who does a continuous audit annually.

KCG is publicly traded. When he tells clients that they are monitored by the NFA and the CFTC, that doesnâ€™t seem to carry much weight so he addÂ´s that the exchanges, particularly the CME, also scrutinizes their activities.

Does that help at all?

Drop me a PM for a contact

What are your thoughts now that knight is trading around $3.50? (Down ~25% yesterday, and down 50% right now today)

Yeah, after yesterday, the last thing I would want is to be involved with a firm owned by Knight. Knight is on the hook, apparently, for their own $450M loss in trading screwups, and add to that the lawsuits that are coming. Get out while the getting is good.

hmmm, my thoughts? I understand, through the media grapevine and from an article in WSJ, capital investors are looking at Knight. I think Knight is a good, cleanly operated company and look like an attractive option for an equity firm to partner up with. In return for capital, gives us a stake in your company. I hope that the other possibility, selling off pieces, does not happen and I really donâ€™t think it will.

Chelonia wrote:hmmm, my thoughts? I understand, through the media grapevine and from an article in WSJ, capital investors are looking at Knight. I think Knight is a good, cleanly operated company and look like an attractive option for an equity firm to partner up with. In return for capital, gives us a stake in your company. I hope that the other possibility, selling off pieces, does not happen and I really donâ€™t think it will.

Fidelity has suspended all business with Knight as of a short while ago. Other Primes are likely to follow imo. It's easy to see the company gone shortly in today's world where one gets out while the getting is good. Who knows what will happen...nobody. Perhaps someone will scoop up the company before the implosion is complete, but I think most are smart enough to see what's happened in recent times and know they should probably wait before bottom fishing until the toilet finishes flushing.

The futures division is operated separate from the securities division. Seg funds are held in banks, Harris Trust, JP Morgan, and the regulators are already in Knightâ€™s house to ensure that operations are clean. Since there is no fraud involved (from what we know) IÂ´m not worried about funds.